Cracks beneath the surface
December 9, 2025
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–Apart from very front contracts, yields continued to press higher. In front of today’s ten-year auction, the yield rose 3.1 bps to 4.188%. 30s closed 4.183%, up 2.2 bps. Although the financial press is trying to manufacture a bit of drama around tomorrow’s FOMC, front contracts are priced near certainty of an ease, and have been for several sessions. FFF6 settled +0.5 at 9635.0 or 3.65 vs EFFR of 3.89. SFRZ5 and H6 both were unch’d at 9626.75 and 9643 respectively. However, H7 (peak contract) settled -4 at 9682 and H8 & H9 were -4.5 at 9668 and 9649.5. All near one-year SOFR calendars made new highs as deferred contracts pressed lower. For example, SFRH6/H7 settled -39, +4 on the day. Recall that with Sept’25 contract as the front (prior to the last two eases) U5/U6 was more like -108 to -100. Which makes sense….Z5/Z6 is now -54.75 and 2 eases have occurred. The point is that FORWARD easing assumptions are being squeezed out of the equation.
–That’s evident in Europe with the attached ERH6/ERM6 spread. Schnabel said yesterday morning that she was comfortable with the next ECB move being a hike, and the March/June 3-month euribor spread went from -3 to zero. The perception of central bank largesse going forward is changing. On the US side, the main question that needs to be addressed by Powell is when the T-bill buying starts, in order to expand reserves and alleviate tightness. So….maybe there WILL be a little drama at the Fed’s press conference.
–On an average day, there are about 50 small earthquakes on the US Geological Survey map. Yesterday there were 100. The world is literally tearing apart! Just kidding, but northern Japan had a big one yesterday, of 7.6 with continuing large aftershocks.
https://earthquake.usgs.gov/earthquakes/map/?extent=-39.23225,-259.80469&extent=70.08056,-37.08984
In the old days bonds used to be sold after disasters, because insurance companies would have to sell assets to raise money to pay claims. Now that chain seems a bit more diffuse, but it’s reasonable to think that perhaps Japan isn’t as likely to support 10s and 30s at the auctions. Just a thought.
–The huge covered call buyer of TYF 113.5 and 114 calls is adjusting, rolling down strikes. For example, a buyer of 30k TYF 112.75/113.5cs for 11. Also bought 113/113.5cs.
Settles:
TYF6 112.75/113.5cs 18 and 7, so 11 vs 112-08
TYF6 113.00/113.5cs 13 and 7 so 6.
Open interest up 32k in each of the lower strikes and -74k in the 113.5 strike.
–ZH reports the CFTC is starting pilot programs to allow Bitcoin and Ether as collateral. (Maybe the financial world WILL literally tear apart…)
